Saturday, January 31, 2009

Correspondent Subuddh P. recently busted me for saying the Internet was "free." Here is his thought-provoking commentary on the true costs of the Web:

The web is not free. It is not really that free economically and it is most certainly not free ecologically and its hidden social cost is enormous. If anything the web is perhaps the most costliest invention of the industrial revolution.

Let us consider the the environmental cost. Google lets you search billions of pages for 'free'. Your search request goes to thousands of machines that are running twenty four hours a day and they require lots of power. Take one day to observe yourself: how many web hits did you make, how many times did you check your email? Each one of these activities requires power and fuel to generate that power. Now imagine billions of people around the world doing the same thing.

This link added by CHS:'Carbon cost' of Google revealed (BBC News)US physicist Alex Wissner-Gross claims that a typical Google search on a desktop computer produces about 7g CO2.However, these figures were disputed by Google, who say a typical search produced only 0.2g of carbon dioxide.A recent study by American research firm Gartner suggested that IT now causes two percent of global emissions.Dr Wissner-Gross's study claims that two Google searches on a desktop computer produces 14g of CO2, which is the roughly the equivalent of boiling an electric kettle.The Harvard academic argues that these carbon emissions stem from the electricity used by the computer terminal and by the power consumed by the large data centres operated by Google around the world.Speaking to the BBC, he said a combination of clients, networks, servers and people's home computers all added up to a lot of energy usage. End of BBC excerpt.

The technology business also generates tons of toxic waste. The turnover for hardware is huge, a business is always updating its hardware all the time and the need for resources is exponential in its growth. Besides, without the tools and consequent costs of the industrial revolution the web would not be possible in the first place.

If you want to measure carbon footprints, please, measure the footprint of your using the web.Now look at the economic cost. Google search is free now, but it is free like television is free. By advertising, creating need for things you don't really need. Oftwominds has had a number of pieces on the advertising machine that manufactures needs. With the credit bubble bursting the average purchasing power is going to be less. In the short run Google may even benefit from this as more and more people go to Google as a cheap way to sell their stuff.

But if more and more people go broke, this advertising will dry up. It's worth remembering, you can't be rich if everyone is poor and makes nothing, because no matter how great your knowledge, if nobody can afford to buy what you make then you will be broke, too.

And the social cost? Well, putting aside the obvious, like surfing addiction, information overload, social withdrawal, porn addiction, the far bigger cost is this: the web gives us the illusion of unlimited *ever improving* choice, which if we buy into it, can only destroy us. Nothing has the potential to ruin a person's life quite like living with this illusion. Even poverty is better. People can still find love, community and fulfillment while being poor.

This is not about having the option of fifty different types of cereals, it's about believing that there is unlimited choice for the important things in life, namely work and family. This illusion allows us to flake out when things get a little demanding or troublesome, there is always something else out there.

Consider online dating which is so popular these days. How easy is it to just flake on the match du jour, break off communication midway because it's too much trouble, you are not really hundred percent sure and there is always some other match right around the corner? After all, don't we get the daily list of matches of new all seemingly exciting people? We can put it off because it's easy to do so and we are not worried because we think there are always other options.

But the human psyche does not work like that. Psychologists will suggest that most people are capable of genuinely caring for at most two or three people in their lifetime, with the usual degrees and exceptions, and this is most likely in their twenties and early thirties. This is when our habits are being formed. At thirty-five the body reaches its peak; after that it's a slow process of decay.

And it takes years to establish any solid relationship. All that romance that at least some of our grandparents and even our parents seemed to have, that everyone talks about but seems so elusive today, it required perseverance, commitment and being true to your word, it didn't just happen. It also helped them that they didn't believe that had that many choices...

The same is true for career. If we jump around from one thing to the next we cannot develop anything in depth. Ditto friendships. Contrary to what the myspace profile might suggest, we can't really have a thousand friends. Again, psychologists will suggest most people can have at most a dozen or so close people in their life; the psyche cannot handle more than that.

The closeness does not develop with an easy come easy go attitude. It is the shared history that creates the bond and the kind of friendships we can make at twenty are very different from those we can at forty. The reality is that to build any kind of a solid career or relationship we don't really have that much time nor do we have that much choice. ( The case for settling for Mr. Good Enough Atlantic Monthly)

Three things have historically restrained human beings. The first two are scarcity and incompetence. The third is an acknowledgement of our mortality and a higher function in life. Why is it that so many Buddhist and new age healing centers have sprung up in America? People are hungry, perhaps they have spent too much time living with these illusions, too much time working in cubicles starting at a fluorescent screen while living in splendid isolation with no community and ritual, all the while justifying the isolation by saying they are searching for true this or that.

It is not technology that is to 'blame' per se. Human know-how is neutral. But even though we may know how to make things better, the human psyche is still the same; we still will go through the same pedagogical cycle. We still make the same transitions, from adolescence to adulthood, from dependency to responsibility, from caring about ourselves to caring about someone else, from maturity to inevitable decline and death.

The mythology of any given time has to prepare us to to live our life cycle while incorporating the tools available; to help us make these transitions during the window of opportunity when we can, while going through the training necessary to successfully make them.

So what are the myths we live by? This seems to be the state of the technology enabled modern mind and it seems a kind of cosmic joke. We believe we have unlimited choice while throwing away cultural values which would have helped us actually make choices.

We postpone the important transitions of life because we believe we can always do them later, and we must be free to do them only when we choose to, as if time will stop for us. We insist that the perfect love, perfect career and perfect everything are out there and fully believe that not only can lightning strike us, but it will strike us, we are entitled to it and it is necessary to hold out for it.

We insist we must feel passion for whatever we do, but reserve the right to flake out whenever things get involved, which is when we actually feel some passion. What is this but, as the thirties and forties roll in, a recipe for introversion, lots of time on the therapist's couch and that prescription for valium and prozac? All this at a time when we are entering a world of far greater scarcity.

The piece on the death of the expert brought suggestions of elitism. But consider the pilot of the US Airways plane who brought the plane down safely in the Hudson. Captain Sullenberger is being described as the last of the American Gentleman; as someone who who took his responsibility of being captain seriously, who was ready to leave his sinking ship only when the last passenger had been taken off, a man of impeccable manners.

Who thinks these kinds of values just happen? Of course they don't and of course they are elitist: they can only be learned over years of training, commitment, sacrifice and hard work. And Captain Sullenberger is the elite of the elite, the best of the best. Why is he the last of the American gentlemen? Because we no longer care about these values. But ask yourself, the next time you are on a plane would you rather it be commanded by someone who has these values or someone who doesn't?"

Thank you, Subuddh, for this cornucopia of food for thought. Subuddh requested I post his email should you wish to correspond with him: subuddhparekh1@aol.com

Friday, January 30, 2009

Friday Quiz: The Fortunate 400

Q: How much money do you need to make per year to join the "Fortunate 400," the top 400 taxpayers in the U.S.?A: The nation's top 400 taxpayers made more than $263 million on average in 2006, as the stock market was rallying, but paid income taxes at the lowest rate in the 15 years that the Internal Revenue Service has tracked such data, according to figures released Thursday.

The average income of this group was the highest recorded by the IRS and was up from $213.9 million the year before. In constant dollars, the average income of the top 400 taxpayers nearly quadrupled from 1992, the first year such data were collected.

Meanwhile, the group's average income tax rate -- calculated as income taxes paid as a percentage of adjusted gross income -- fell to 17.2% in 2006 from 18.2% the prior year. That's down from a high of 29.9% in 1995.

IRS data last year examining the top 1% of taxpayers based on adjusted gross income -- roughly 1.4 million taxpayers -- showed their average tax rate in 2006 fell to its lowest level in at least 18 years. This larger group also garnered the highest share of the nation's adjusted gross income for two decades, and likely the highest since 1929.

The cutoff for being included in the top 400 was adjusted gross income of $110.6 million. That doesn't include some items, such as tax-free interest from municipal bonds. It is also higher than the taxable income taxpayers use to calculate their tax burden."

Can we finally dispense with the threadbare ideological cover that low taxes on stupendous unearned income is necessary because this fuels "the productive elements in our economy"? Excuse me, but just how "productive" is it to collect hundreds of millions in dividends, capital gains and tax-free muni bonds?

The taxpayers who are actually the top producers by the practical metric of creating goods, services and jobs tend to make $100,000 to $250,000--small business owners, professionals, entrepreneurs, managers of small companies, etc. When you count FICA (Social Security) and self-employment taxes and Medicare taxes, these taxpayers usually end up paying about 35-45% of their gross income in Federal taxes--a far, far higher rate than the 17% enjoyed by the top 1% who own 3/4 of the productive wealth of the nation.

Is it really too much to expect this elite to pay taxes at the same rate as the citizenry slogging their guts out to keep the real economy running?

And note that tax-free municipal bond income was not even counted. That means hundreds of millions in real income is not even being counted.

How about we cap tax-free muni bond income at $100,000 per tax return, and then tax everything above that at standard income rates? 99.9% of the owners of muni bonds or muni bond funds make well under $100,000 per year from tax-free bonds, so such a generous limit would only affect the "Fortunate 400" or perhaps a few thousand fortunate few at most.And please don't tell me the muni bond market will collapse if the Fortunate 400 can't collect hundreds of millions in tax-free income. The muni bond market is collapsing because the local governments and agencies which issue such bonds are headed straight to insolvency.

Here's one more thing: fully 1/3 of the Fortunate 400 would have paid no tax at all on their $263 million incomes if it weren't for the Alternative Minimum Tax. Now the AMT needs to be radically revised to capture only the top 5% of tax evaders, but the importance of such a net in a nation where the top 1% can buy tax breaks and protect their income basically at will via political influence and high-priced tax attorneys is obvious.

Here are two articles which support yesterday's thesis on bond yields and oil prices.Correspondent Craig McCarty sent in this Bloomberg piece:

Treasuries Headed for Full-Blown Bear Market, Citigroup Says:“This may sound a bit ridiculous, but we think we have begun a full-blown bear market in fixed income,” wrote Tom Fitzpatrick, Citigroup’s New York-based chief technical analyst, and London-based strategist Shyam Devani. “The commodity that is going to be the most in demand as far as the eye can see is capital. As a consequence, the cost of capital can only go one way -- up.”

The 30-year bond’s yield may rise to 5 percent by late 2009, the highest level since August 2007, according to Citigroup. The U.S. will probably borrow $2.5 trillion this fiscal year, compared with $892 billion last year, according to Goldman Sachs Group Inc.

“The most striking feeling we have as 2009 begins is that there is this wall of consensus negativity about financial markets,” the analysts wrote. “We believe this comes from the need for huge government issuance around the world competing for a scarce resource.”

Oil Rebound Could Drown in Diesel (WSJ)Last year's superspike in oil prices was diesel-powered. That is bad news for oil bulls.This is no mere rear-view exercise. Diesel demand is tied closely to trade and economic growth. With the likes of Volvo reporting slumping demand for trucks, and China's power output falling, the diesel train has been thrown into reverse. Without it, hopes of a rebound in crude prices are misplaced.

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Thursday, January 29, 2009

Endgame 8: Energy, Debt and Bonds

As oil has plummeted in what I term a "head-fake," we foresee a volatile and disruptive interaction between debt, bonds and energy supply/demand and price.

Back when oil was shooting up over $100 a barrel, I suggested that the coming global recession would cause oil prices to crash in a "head fake" which would create an illusion of plentiful oil. Here's the chart (apologies to longtime readers who've seen it too many times already)

What I want to expore today is the confluence of debt and energy. What we're seeing now is governments around the world borrowing and spending several trillion dollars in fiscal stimulus; the U.S. alone has staked several trillion dollars in borrowed money on rehabilitating its crippled financial sector and is now set to spend another $800 billion on direct goosing of the economy.

European and Asian nations have announced their own stimulus packages, and all but China's will be financed by the sale of government IOUs/bonds--in essence, borrowing the money from those with surplus capital looking for "safe haven." (And with tax revenues dropping in China, perhaps even that government will soon be borrowing to support deficit spending.)

But as China's economy craters (and with official statistics ginned up, who can tell what's really happening there) and the oil exporting nations' gusher of profits vanishes, then just who has the trillions of dollars in surplus to fund this mighty paroxym of panicky government borrowing? The most reliable buyers of U.S. debt/bonds were the exporting Asian nations (Japan and China) and the oil exporters (Saudi Arabia and Gulf oil states).

Now that oil has fallen drastically, the oil exporters are finding they face not wellsprings of endless billions of excess capital to invest but billions in deficit spending. As noted here many times, demographics are a tightening vise in all the Gulf oil states: their population is booming, as is their welfare-state spending, even as their revenues crash.

Even worse, the need to fund their welfare states will draw funding from whatever they planned to invest in their oil infrastructure/future production capacity--and for most oil exporters, even those sums were too paltry to maintain current production, never mind boost supply.

This is the real killer effect of the head-fake: investment in future production capacity will drop to zero as the ruling elites spend every dime on suppressing their restive, welfare-dependent populaces. So when demand does pick up again (let's say in 2011-2012, if not sooner) then supply will be far more constrained than it is today.

Recall that it takes years of stupendous investment to extract more oil from any source; the cheap, easy-to-get stuff is already gone. Even the Saudis are spending tens of billions of dollars to maintain production.

How long can these nations (including Iran and Venezuela) continue their welfare spending/ subsidies if oil keeps falling in price? No one knows, but the clock is definitely ticking.

The one thing we know for sure is that their excess capital which once bought U.S. bonds is gone. The same is true of China: now that nation must redirect its surplus capital into its own domestic economy/welfare spending.

Put this together and here's what is taking shape:

1. The tremendous fiscal goosing by all governments will create a temporary floor under oil's relentless decline. Spend a couple trillion dollars and you will certainly create some demand for oil which would otherwise not exist.

2. Thus we can anticipate a rally in oil/natural gas prices, and the illusion that the "head-fake" decline is over. Once the stimulus spending has run its course, however, then demand will fall again and oil will resume its head-fake fall--perhaps all the way down to test its 1998 lows around $12/barrel.

3. Oil will stabilize in price, but at a price too low for oil exporters to support both their welfare states and investment in their oil infrastructure. They will of political necessity choose welfare spending thus allowing their oil production to fall into irreversible decline.

4. As governments from Japan to Germany borrow heavily to fund their desperate fiscal goosing, they are tapping not an endless supply of money but the last few feet of muddy water at the bottom of a fast-drying well.

The big global surpluses of capital sloshing around the globe looking for a nice fat return are over. Everywhere assets are depreciating/falling in value, payrolls and profits are declining, and with the popping of global asset bubbles, nothing is even remotely in place to change those trends.

5. Thus at some point the voracious appetite of governments to sell debt/bonds to raise cash to spend will run headlong into the stone wall of declining supply of surplus capital. It all comes down to supply and demand. We speak of the Fed "printing money" but as others have shown, the governments don't actually print money and spend it: they create lending via fractional reserve banking, but the fiscal stimulus funds are borrowed in the bond market.

Once there's not enough supply of capital to buy all the bonds being hawked all over the world, then the prices of those bonds will have to rise to draw funds out of other investments. It is thus easy to anticipate yields doubling and then tripling as governments compete for scarce capital. (And rising yields equal rising interest rates.) there simply isn't enough surplus capital to fund new mortgage debt, new corporate debt, new local government bonds and the fantastic sums being borrowed by central governments.

6. In the big picture, the global economy is squandering the last cheap oil to fund fiscal stimulus of economies based on cheap, abundant oil instead of spending those borrowed trillions on a less-oil dependent energy infrastructure.

The net result of that global mal-investment will be an eventual resurgence of demand for oil which is far higher than available production/supply. Once the "head-fake" is over, then this mismatch of supply and demand will sent oil prices soaring to heights few anticipate now--$300/barrel seems entirely plausible--and make supply unpredictable.

18 new provocative, thoughtful and insightful reader comments on nuclear power, reusing warheads, distributed power, agricultural endgame, outrageous government fees, "be careful what you wish for" media critique, innovation and more.New Reader essay! Report from California(Steve R.)Thought you might be interested in some reports from the front lines.First off, I have learned that the number of "extreme" poaching offenses in the state during 2008 increased over prior years. We have discussed this before in our correspondence and our prediction that the economic downturn will increase impacts on ecosystems seems to be materializing.Regarding crime, a funny thing happened to me this past holiday weekend.

What's for dinner at your house? has been updated with two new recipes: Quick Easy Vegetable Soup and Pork Butt Stew. New Operation SERF Installment:Operation SERF, Part 8Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

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Wednesday, January 28, 2009

Endgame 7: The Dollar, Bad Money and Purchasing Power

As all currencies' relative purchasing power has declined since 1998 when priced in gold, many are asking: when will the dollar fall in half? When will it go to zero? No one knows the answers to specifics, but we do know that "bad money drives out good money." That truism suggests several likely scenarios based on history.

We all want to know what's going to happen to the value of paper money--and when. Yes, it's easy to predict it will all go to zero, but that skirts the reality that relative value and purchasing power are constantly shifting.

Thus the dollar has strengthened hugely from last summer when measured in oil or grains, and has actually improved versus gold as well. The pound has plummeted when measured in dollars, and tidy sums were made by those buying dollars at its relative bottom.

What rarely gets any attention is the politics of paper money and relative value. Many commentators talk about the government's need to inflate currency so as to pay off debt with "cheaper" dollars/euros/yen/yuan etc., but few ask this key question: What policy benefits the top 1% who own 3/4 of all productive assets?

If you (and your family) control $100 million+ in productive assets, then elected officials/the government listen to your needs. Thus we can safely predict a few things:

1. The benefits of whatever action the government might take will accrue to the top 1% which owns most of the productive assets (that is, income-producing). The effects on the government itself and the economy at large are secondary.

2. Bad money will drive out good money.

Put another way: if the dollar going to zero will wipe out a huge percentage of the wealth of the top 1%, then the dollar will not go to zero.

Many assume the dollar will go to zero and gold will then reign supreme. While it is true gold is a store of value which can't be depreciated by fiat (though governments can arbitrarily set the price and then confiscate all privately held gold, as the U.S. government did in 1934), it is inherently unproductive.

That is, it is too heavy and prone to theft to be useful as a means of trading exchange; even in the 1500s, letters of credit worked much better than physical gold.

Think about it. The precious metals went into Indian and Chinese Imperial/feudal vaults and stayed there, doing absolutely nothing, while the Europeans took their letters of credit, capital raised by stocks, futures contracts, insurance/hedges, trade routes, etc.--all the mechanisms of modern capitalism which increase the velocity and utility of money--and built trade-based empires.

The piles of gold and silver were trapped capital on a vast scale, essentially dooming the Chinese and Indian empires to capital-poor, trade-poor, credit-poor decline.

Thus we should focus not just on stores of value but on means of exchange. And that brings us to bad money driving out good. Historian David Hackett Fischer explains how this works in his endlessly insightful history of economic cycles, The Great Wave: Price Revolutions and the Rhythm of History . In the old days, gold and silver coinage would get devalued in one of two ways. Merchants and others would shave off infintesimal slices of metal from the coins, reducing their value over time, or the issuers of the coinage (the royalty) would remint coins with less precious metal and more base metal.Naturally, as a merchant or trader or farmer, you would try to get rid of the shaved or debased coins and hoard the "full value" ones. Thus bad money (of reduced value) would drive out good (full-value) money.

The idea of inflating/depreciating your way to prosperity is old indeed. Hundreds of years ago the same game was played: the government/crown spent more than it collected in taxes and revenues, and so it borrowed from (often Dutch) private banks. As its debts mounted, the allure of issuing new depreciated coinage --that is, to pay off the debts with less gold and more lead--became ever more compelling.

But of course all the players knew what was going on, and the endgame was the crown defaulted on its debt and the game started over with new full-value coinage/money.

Now Spain had the good fortune to find staggering sums of "free money": the silver and gold extracted from its New World conquests. Unsurprisingly, most of this precious metal ended up in the hands of the Crown's creditors. Once borrowing gets "easy"--and who wouldn't consider a semi-annual fleet of treasure ships good collateral?--then debts mount even faster than the treasure being offloaded from the galleons.

Fast-forward to the present. Hmm, sound familar? The American Empire has had good collateral for quite some time; people have reckoned that the U.S. will make good on its debts one way or the other. (A little conquest never goes out of fashion.) But there was always the immense productivity of the American economy and land as backup collateral to the government, and in a very important sense that is still the collateral beneath the profligate government we have elected since 1981.

Borrow and spend, borrow and spend, brawk! The parrot stays on its perch regardless of which party holds sway. Why? Because borrowing is so "easy".

The other reason people place value in the dollar is they have no choice if they want to maintain a mercantilist, export-based economy. As I have covered here many times, economies from Germany to China are essentially based on exports. If exports falter, there is no Plan B. As the global economy has followed this same model everywhere-- Japan showed everyone how protecting domestic production and exporting excess production could enrich a nation very quickly--then the sole end buyer has been the U.S.

For this reason, I am wary of calls for the dollar to fall in half or zero. Compared to currencies based on a failing export model of growth, the U.S. currency is looking pretty good; in very base terms, its collateral is viewed as superior to others based on commodities which can plummet 80% in a few months (see oil exporting nations) or export models in a global recession (see China).

In other words, no matter how much gold you have in the vaults, you still need a medium of exchange.

The important book The Dollar Crisis: Causes, Consequences, Cures makes a strong case for the thesis that no nation can run deficits on the order of 5% of GDP for very long before its currency collapses; and this certainly has the weight of history behind it.

But when the entire world other than the U.S. is counting on asset bubbles and exports to fuel growth, then the case can also be made that in a world of bad choices (i.e. fiat currencies), there are good reasons to hold one's nose and hold dollars as a better bet than all the others.

As I have also posited here many times, this need for a means of exchange could be filled by a private, transnational trading currency based on gold or a basket of commodities. Many commentators foresee the Gulf oil states or China creating a gold-backed currency, but the problem with this scenario is they simply don't own enough gold to back a practical currency.

The Gulf oil exporters could back a currency with oil, but if recent volatility is now the norm, the wild swings in oil valuation would render such a currency awfully risky to hold.

It may well be that we shall see a mix of various currencies, each of which plays a slightly different role in the global economy. Thus a private currency backed by 500 tons of gold (supposedly the amount now held by the gold exchange traded fund GLD) could play a role as a store of value.

But the problem with any gold-backed currency is as old as money itself: bad money will drive out good money. Thus when offered a choice, I will hoard my gold-backed "quatloos" and offer my dollars/yen/yuan/euros in exchange for something tangible. I will only offer up my "real money" if the seller insists, and there is simply no alternative to the immensely profitable goods he is offering.

But then the capital trap opens up for the seller: if the seller hoards the "good money" as a store of wealth, he is doomed to a store of value in a vault with no income or velocity and thus no productivity.

So while the endgame of all debased/fiat currencies is the same--they will drive out good money to the point of default/collapse--it isn't as easy as just hoarding physical gold, because it has never made a practical means of exchange and because the temptation to sink it in a capital trap is so great.

At some point, governments will re-issue new currency/coinage in a vain attempt to restore value. If their policies are prudent and their borrowing trivial, that might well work for quite some time. Or perhaps gold will rise to $10,000 per ounce, high enough that a practical gold-based currency (or currencies) will be issued in such vast sums that it won't be driven out by bad money.

Right now, the only hoard of gold large enough to back a currency of global proportions sits in Fort Knox. Maybe when gold is $10,000 per ounce, perceptions of the value of fiat currencies will change and the wisdom of a can't-be-depreciated-by-fiat currency will be recognized.

New Reader essay! Report from California(Steve R.)Thought you might be interested in some reports from the front lines.First off, I have learned that the number of "extreme" poaching offenses in the state during 2008 increased over prior years. We have discussed this before in our correspondence and our prediction that the economic downturn will increase impacts on ecosystems seems to be materializing.

Regarding crime, a funny thing happened to me this past holiday weekend. What's for dinner at your house? has been updated with two new recipes: Quick Easy Vegetable Soup and Pork Butt Stew. New Operation SERF Installment:Operation SERF, Part 8Chris Sullins' "Strategic Action Thriller" is fiction, and on occasion contains graphic combat scenes.

Thank you, Rory V. ($20) for your most generous contribution to this site. I am greatly honored by your support and readership.

Thank you, Katherine R. ($20) for your much-appreciated generous donation to this site. I am greatly honored by your support and readership.

Tuesday, January 27, 2009

Endgame 6: Housing As Shelter, Not Speculation

As housing and real estate continue to decline, the questions arise: how low will it go? When will it hit bottom? There are powerful reasons to suspect the answers are: much lower, and not for quite some time.

I have been addressing "how low can housing go?" since 2006, as these charts illustrate:

I think the last chart has proven remarkably prescient to date, with the collapse of Lehman Brothers providing the extrernal "shock" (never mind it was entirely predictable, it was a "shock" to the MSM).

We are now approaching "the last gasp of the bottom fishers" which I now expect to last into 2010--that is, everyone has accepted that 2009 will be a year of deep recession, so they're busy buying for the "upturn" which the MSM is predicting will begin in 2010.

The MSM will be as accurate in that prediction as they were about Lehman Brothers or the housing bubble imploding. Bottom-fishers who snap up "bargains" in 2009 (as noted above, houses which once sold for $470,000 can be had for $200,000--such a deal!) will be finding in 2010 that market rents (assuming they're even able to rent their bargains without spending tens of thousands of dollars in repairs) are not even paying their costs of ownership, and so they'll be trying to dump their "bargains" purchased for $200K for $150,000--and finding few buyers.

Even my wife is skeptical of my longstanding calls for housing in once-hot locales to bottom at 10% - 20% of their bubble-era valuations. Thus on the chart above I indicate that a house which sold for $470,000 at the bubble top may well fetch a mere $70,000 at the final saucer-shaped bottom.

(That is, the bottom will not be marked by some sharp capitulation as occurs in the stock market; the bottom will last for months or even years, and the recovery will be akin to watching paint dry.)

I reiterate that this is a prediction based in history--which means that it may not happen, but that the possibility falls solidly in the realm of historic fact. In the depths of the Great Depression, highrise buildings in Manhattan sold for about the value of the elevators: roughly 10% of the cost of the entire building's construction.

In areas with decreasing economic opportunities such as greater Detroit, houses are already sold for $1, and many are listed for less than $10,000. Prices in Manhattan, Honolulu and San Francisco have softened, but watch what happens when global tourism dries up and blows away to a mere 5% of its previous traffic, and what happens when the financial-services sector of the economy shrivels from 18% of GDP down to 2 or 3%.

Then there's the little problem of assessing the risk of buying real estate. Who's to say that this "bargain price" may not fall further? Let's say the house which once sold for $470,000 is now available for $200,000 for 25% down ($50,000). What if that "bargain property" should fall 20% further in value down to $160,000? Not much of a drop, you say, in light of how far it's already declined?

Perhaps--but the bottom-fisher just lost their entire down payment, for after losing $40,000 as the price dropped, the remaining $10K is eaten up by the transaction costs of selling (6% of $160,000 is $9,600.)

But won't the bottom-fishers be rewarded as valuations climb after the recession? As noted here many times, let's start with the fact that according to the Census Bureau, some 18 million dwellings in the U.S. are vacant--and given the homes under construction and rising foreclosures, we can safely round that up to 20 million. That's a lot of supply for an uncertain future demand.

For the 76-million strong Baby Boom is aging and will be seeking to sell their primary residence in order to enter retirement/care homes or smaller dwellings closer to healthcare and other services. These demographic forces are at work regardless of the length or depth of the recession/depression.

As the economy shrinks, as lending tightens, as deflation eats away at assets and as stock and bond declines wipe out pensions, then we have to ask: how long might this real estate recession last? If the answer might be 10-12 more years, then the natural question becomes: why buy now and have your capital trapped for a decade or longer?

Housing did take a sharp fall in Q3 2008 after an illusory period of stabilization in many markets, and so the capital trap has shut on everyone who "bought the dip."

So when does housing finally bottom? In my oft-stated view, two conditions control that timing:

1. Housing must be widely viewed as shelter, and be totally discredited as a speculative vehicle for wealth creation.

2. Market rents must provide a buyer/investor with an absolute cash-accounting positive return, that is, after all repairs have been made and all costs of ownership have been tallied without tax-related legerdemain. This calculation must also include vacancies, i.e. the reality that the dwelling may not be generating income 365 days a year.

When these two conditions have been met, then we'll be somewhere in that multi-year saucer-shaped bottom in housing/real estate.

New Reader essay! Report from California(Steve R.)Thought you might be interested in some reports from the front lines.First off, I have learned that the number of "extreme" poaching offenses in the state during 2008 increased over prior years. We have discussed this before in our correspondence and our prediction that the economic downturn will increase impacts on ecosystems seems to be materializing.

Regarding crime, a funny thing happened to me this past holiday weekend."What's for dinner at your house? has been updated with four new recipes. New Operation SERF Installment:Operation SERF, Part 8Chris Sullins' "Strategic Action Thriller" is fiction, and contains graphic combat scenes.

Thank you, Judas Z. ($10) for your very generous contribution to this site. I am greatly honored by your support and readership.

Thank you, Robert H. ($50) for your exceptionally generous donation to this site. I am greatly honored by your support and readership.

Monday, January 26, 2009

Endgame 5: Maintaining a Facade of "Free Market Capitalism"

As the Federal government sinks ever larger sums in the flailing U.S. banking and financial-services sectors to cover privately held bad debt, ideology and a conduit for future private profits require that a facade of "Free Market Capitalism" be maintained at all costs.

Charts and metrics are useful tools, but they provide little explanatory force when it comes to greed and ideologically driven decisions. Thus we can study the charts of money supply, credit expansion, bad debts, illiquid CDS and CDOs, plummeting real estate values and the insolvent balance sheets of U.S. banks, and conclude that outright liquidation of Citicorp et al. and the nationalization of what's left is the only rational way forward.

But instead we have public money being used to backfill private losses to "recapitalize" the banks and mortgage industry while leaving current shareholders in place: in other words, socialize the risks/losses but leave a conduit for future private profits at taxpayer expense.

Thus even as private-sector banks are essentially being socialized on a heretofore unimaginable scale (and government agencies take small "preferred shares" positions in lieu of 100% nationalization), private ownership is being "saved" so that once the sector is stabilized the profits will again flow to private hands. You know the drill: socialize risks, privatize (future) profits.

One way to accomplish this was to arrange "shotgun marriages" between failing financial houses like Merrill Lynch and (apparently) better-capitalized cousins like Bank of America. As the Wall Street Journal reported:"(BofA CEO) Lewis thought about scrapping the deal (to acquire Merrill) but decided against it after federal officials urged him to reconsider."

"Urged him to reconsider." That's rich. You mean if I keep you awake for 24 hours under hot lights and twist your arm behind your back to the breaking point until you agree to marry a massive liability, I'm simply "urging" you? How very cricket of you to agree. No doubt Wells Fargo was similarly "urged" to acquire the collapsing Wachovia.

Why not liquidate the losers and sell off what's left to the survivors? Or if we're picking up the tab, why not ensure taxpayers own the entire bank so future profits (if any) flow to those making the investment?

A facade of "private ownership" is being maintained, at enormous public expense. Why? Clearly, the one obvious reason is to protect the assets and incomes of current players and owners; were a bank to be nationalized in all but name, as was the case with AIG, then current owners get a mere fraction of their once-mighty asset.

So why not pay off the current owners and fully nationalize the banks? There appear to be powerful ideological reasons for U.S. banks to be socialized behind a facade of "free market capitalism."

The implosion of the entire global banking/mortgage industry has essentially delegitimized the "free market capitalism" ideology which the U.S. has been pleased to espouse as the royal road to prosperity for decades.

To nationalize the U.S. banking, financial services and mortgage sectors entirely would be a total capitulation, admitting that this model was fatally flawed.

Now we all know the U.S. financial system is "free market capitalism" in name only; the Federal Reserve (itself a private institution) manipulated interest rates to dangerously unprecedented levels for years, for instance; that was hardly a free-market mechanism.

"The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe. Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played. These weaknesses will eventually be repaired, but in the interim, they will accelerate trends that are shifting the world's center of gravity away from the United States.

A brutal recession is unfolding in the United States, Europe, and probably Japan -- a recession likely to be more harmful than the slump of 1981-82. The current financial crisis has deeply frightened consumers and businesses, and in response they have sharply retrenched. In addition, the usual recovery tools used by governments -- monetary and fiscal stimuli -- will be relatively ineffective under the circumstances.

This damage has put the American model of free-market capitalism under a cloud. The financial system is seen as having collapsed; and the regulatory framework, as having spectacularly failed to curb widespread abuses and corruption. Now, searching for stability, the U.S. government and some European governments have nationalized their financial sectors to a degree that contradicts the tenets of modern capitalism.

Much of the world is turning a historic corner and heading into a period in which the role of the state will be larger and that of the private sector will be smaller. As it does, the United States' global power, as well as the appeal of U.S.-style democracy, is eroding."

I doubt if anyone is fooled by this facade or the legerdemain of treating taxpayer bailouts as "investments." (I also doubt the debt-serfs (I am certainly one) will arise to overthrow the Manor House Lords; we're too atomized and distracted by the pressures to make ends meet/pay our debts. That's what they're counting on, of course....)

But with this ideologically loaded "cloud" darkening U.S. influence and policy, I think it is a very safe bet indeed that Bank of America and Wells Fargo will never be allowed to go under or be nationalized. Their "show weddings" to Merrill and Wachovia have significance far beyond our own shores, and for this reason alone the "marriages" will be "made to work" to the benefit of all parties--including current shareholders of BAC and WFC. Only the hapless taxpayers will be left with the trillion-dollar bill.

"Thought you might be interested in some reports from the front lines.First off, I have learned that the number of "extreme" poaching offenses in the state during 2008 increased over prior years. We have discussed this before in our correspondence and our prediction that the economic downturn will increase impacts on ecosystems seems to be materializing.

Saturday, January 24, 2009

Rethinking Nuclear Power

All energy sources require tradeoffs. Perhaps nuclear-generated electrical power is less negative than commonly assumed.

Knowledgeable reader Chad W. recently offered a fresh look at the positive tradeoffs in generating electrical power with nuclear energy. Yes, storage of waste is an issue--but perhaps the danger of much of the waste has been blown out of proportion.

I have read that uranium is in its own "peak" depletion cycle, which raises the security issues of using plutonium/breeder reactors on a long-term basis.

Another contributor (Bart D.) recently asked if weapons-grade material from recycled nuclear warheads could be used as fuel--an obviously better use than letting it sit around unused. Though I do not know enough to say, I suspect the plutonium cores of warheads are difficult to fashion into fuel--but I welcome any more knowledgeable opinions on the subject.

Here is Chad's commentary:"I enjoy reading your blog a lot, you are a positive and progressive thinker. This essay is regarding your post Innovation Comes in Many Forms.

I think you are missing the mark on you concern over electricity generation. Here are the statistics on the sources of electric generation in the US:eia.doe.govAs you can see, Petroleum is a small fraction. Even though the problems caused by Peak Oil will be numerous and severe, I believe the impact on electricity generation will be minimal based on these numbers.

On other words, you are misleading when you confuse the issues of Peak Oil with the future of electricity generation in the US. Even though it does not fit in with the traditional green activist positions, I believe the Nuclear power is an extremely viable answer to this problem. I grew up in Carlsbad, New Mexico where there is a Waste Isolation Pilot Plant (WIPP) facility for low-level nuclear waste. It is fine. A complete non-issue, other than the local people employed there for going on two decades, and related economic stimulus to the town (which is otherwise dependent on the dying tourism and potash industries).

Since my Peak Oil awareness moment, I've been thinking a lot about what the future of energy could look like, and discussing the topic with people.

One of my best friends works for a power company in New Mexico, and he claimed that nuclear energy was the most viable short and long-term option, if fuel recycling is allowed as an option. Why don't more people talk about nuclear fuel recycling? It makes nuclear much closer to a 'renewable' energy source.Small Reactors - "Nuclear Batteries":* slashdot.orgIn Defense of Nuclear Energy:* ecolo.orgSolar Panel Toxic Waste:* washingtonpost.comWaste Isolation Pilot Plant:* westgov.orgRecycling links:* alsos.wlu.edu* chemcases.comBottom line, when I look at the downsides of Nuclear, they are miniscule compared to the alternatives, and for quickly ramping up, the practical logistics of nuclear are much better than building billions of dollars of solar panels and windmills which will have their own environmental impact.

I am not afraid of nuclear waste. I AM afraid of the the long term effects of coal mining/burning, acid rain, etc; as well as the devastating effect of dams on the nation's waterways; as well as the risk that we simply won't be able to meet our short-term electrical generation needs with solar, wind - and that these deployments would cause their own problems. Nuclear is here, it works, and we have already overcome the majority of the logistical and technological hurdles, as you mention in this article.

The only opposition is political, ironically from the green movement and other like-minded activists, as well as the coal/construction lobby. Greens and activists due to knee-jerk reactions (Three Mile Island was a non-event!) and the coal/construction lobby due to blatant financial interests.

We really need to think outside the box, and for electrical generation, I think nuclear is clearly the best short-term solution. Also, if it enables us to move more quickly and cleanly (than solar/wind) to an electric-based rather than fossil-fuel-based society, it is a long-term benefit as well."

Thank you, Chad, for a well-reasoned and sourced essay on a topic of ever-greater importance.

The "endgame" series continues next week.

Housekeeping notes: Unfortunately no readers stepped forward to host a forum for oftwominds.com readers. Thus that remains a future possibility only at this point.

In another show of astounding idiocy, I just completed another comic novel nobody asked for and few if any will ever read, title "Bidding for Love." My initial pitches to agents have been rejected at a brisk pace.

I apologize for falling behind on my correspondence, and will be better able to respond in a timely fashion in February. I have read each email received and thank you very sincerely for writing.

Thank you, James C. ($30) for your most generous contribution to this site. I am greatly honored by your support and readership.

Thank you, Bill K. from Washington state ($100 via mail) for your astoundingly generous donation to this site. My thank-you card to you was returned; please email me so I can thank you properly. I am greatly honored by your support and readership.

At several readers' recommendations, I switched to Adsense from the forbes.com ad network.

Operation SERF part 8 (Chris Sullins' serialized novel) is in the works. Stay tuned. In the meantime, follow my supremely foolish twitter novel in the upper left sidebar.

Friday, January 23, 2009

Friday Quiz: How Much Gold Does the U.S. Government Own?

Q: How much gold does the U.S. Government own?A: about 8.25 tons, or 264 million ounces.

United States Bullion Depository (at Fort Knox)The United States Bullion Depository holds about 4,603 tons (4,176 metric tonnes) of gold bullion (147.399 million troy ounces). It is second in the United States only to the Federal Reserve Bank of New York's underground vault in Manhattan, which holds about 5,000 metric tons of gold in trust for many foreign nations, central banks and official international organizations.

Gold holdings peaked during World War II at 649.6 million troy ounces (20,205 metric tons). Current holdings are around 147.3 million ounces (4,570 t) in around 368,000 standard 400 troy ounce (12.4 kg or 27.4 lb avoirdupois) gold bars. At April 2008 rates of $913 an ounce it is worth roughly $134 billion.

The 1975-1981 audit has "covered more than 212.7 million fine troy ounces of gold" which "represents over 80 percent of the total amount of United States-owned gold of 264.1 million fine troy ounces."

This works out to about $264 billion at $1,000 an ounce; if gold were valued at $10,000 per ounce the value would rise to $2.64 trillion.

If the dollar were backed by gold valued at $10K/oz., would $2.6 trillion be enough dollars to facilitate commerce? Given the concurrent use of other gold-backed currencies (extra-national/private, regional or national), it seems likely the answer would be yes.

Another nutty project: For those who enjoy getting text messages during the day, and who might welcome an amusing distraction from the daily grind, I've launched a Twitter version of my zany novel Kama Sutra Cadillac . If you want to follow along, check the upper left sidebar for daily updates or click the link to follow the story via Twitter.

There are a few other twitter novels out there so I reckoned I'd toss my hat in the ring as well. I hope you enjoy the story.

Thursday, January 22, 2009

Endgame 4: Agriculture, Resource Extraction and Famine

The endgame isn't limited to the global financial meltdown or the complete repudiation of existing debt, policies and financial structures; it includes the production of abundant food with cheap abundant energy and the resulting fertilizers and pesticides.

Knowledgeable reader Bart D. from Australia recently provided an eye-opening report on the endgame in agriculture. We all know highly productive agriculture depends (like everything else) on petroleum to move products and power equipment, but it's not just transportation which is dependent on fossil fuels: it's the fertilizer, too. And the same endgame applies to all other traditional resource extraction structures as well. Here are Bart's comments:

"It seems like a lot of observers who are following the financial problems are being insidiously distracted from the real 'crisis' looming large over the future.

The entire economic system seemingly requires abundant and cheap energy to enable the stupendous amounts of waste that a modern economy creates through its function.

It now likely that we can no longer look to the past to estimate the future. The key condition of abundant resources and spare capacity of the earth to provide for an expanding human population in probably no longer valid.

The very first time that people in developed countries experience a real shortage/ unavailability of fuel/food and discover what happens when a system gets compressed by a steadily sinking resource 'ceiling' … we need to expect severe ramifications.

At this point I haven't seen anyone predict whether the developed nations of the world can gradually decline to a more equitable standard of living …. Or if the demands for war to keep a greater share of the resources to ourselves gains traction and results in the re-conquest/colonisation of africa.

I just can't see a way beyond 2020 that doesn't involve a massive slide in wealth for people of developed economies or a very serious de-population event (ie military or socio-economic war) that brings the total global population back into balance with what the planet needs to provide us with to live our current lifestyle.

It seems like any investment that isn't related to good agricultural land and the capacity to farm it and protect it …. Is not really a relevant investment for the future we are heading towards. Marc Faber has picked that idea correctly.

I work in Rural Business and I can see very grave challenges facing our ability to avoid the biggest killer of people throughout history: Famine. (emphasis added--CHS) We need too many resources, that are now in serious supply decline, to keep going as we are.

Its not realistic to 'go organic' at our current population level and expect to feed everyone … and that’s without the growing problem of climate uncertainty adding to the mix. There IS NO ALTERNATIVE food production system that can sustain us. Only when population levels fall to pre 1860's levels (ie before the age of mineral fertilisers) will things stabilise again.

I believe, from a historic perspective, a breakdown in agricultural systems/ productivity and the resulting famine has been responsible for more civilisations /societies collapsing than any other factor. It’s THE thing that no one is seeing coming right now (whilst they worry about how to ride the stock market gyrations and argue the pro's and Cons of owning gold or government bonds) and that’s why it will be such a massive event. I suspect that some time before 2020 an ounce of silver will equal the value of a bucket of wheat in some parts of the world. (ownership of gold probably having been restricted to a small military/social elite class).

I feel sorry for the people of Africa. As the weakest continent, with a lot of resources we (and China) want, they can expect the fate of the Native Americans. They've got what we want and they'll be 'eased' out of the way. It will be the 1800's revisited.

At this point I asked Bart about the prospects for alternative energy in the farm-economy, such as wind-generated electricity being used to power tractors.

"We have some very expensive new wind farms my region. They barely supply enough electricity to power the basics for our regional population of about 15 thousand people. We still use a lot of power from a coal fired plant 300km away. I can't imagine having enough generating capacity to run a fleet of farming vehicles.

I also can't imagine where all the important metals used in battery/electric motor production are going to come from. I believe (according to others) we are on a downwad slope for mining and refining metal ores in that the ore grades are getting consistently lower and therefore requiring increasing amounts of energy to mine and process them into useful things.

The really major problem with Ag production at the moment though is the amount of Natural Gas used to make the nitrogen fertilisers and ag chemicals. We suffered a price rise in nitro fertilisers here of 300% in two years. Ag chemicals to control pests and diseases also had big rises. When inputs get as high as they are now, (and we HAVE to use them to get target yields and quality standards that make farming viable), when you have a dry year and fail to harvest you go broke in a serious way.

That is, the dollar loss of a crop failure now are up to 3 times higer than two years ago. That means 1 bad year now actually puts you back 3 years in dollar terms. Climate variability here has resulted in 3 failed spring rains in a row and many farmers who have been on the land for 4 or 5 generations are walking away bankrupt because they suffered the financial equivalent of 9 years of drought. Also bear in mind that our regional grain output is dropping as a result of bad seasons so we have less to export.

In other parts of our country Multi-million dollar rice mills sit idle now as there is no water in the rivers systems to irrigate. Our government is paying small block fruit growers to walk off the land and bulldoze their orchards. Why? We need the remaining water to supply cities with a combined population of about 1.2 million. Fresh food prices have doubled over last two years because irrigators are short on water and big farms are buying the water from small farms at unheard of prices to keep things functioning.

Last year, water allocations on our Murray river (biggest system in Australia) were at less than 10% of 'normal.'

America is fortunate that it still has an abundance of good agricultural land with good rainfall compared to your population size. You should invest in low energy ways to make it work well. You, along with Russia and Eastern Europe and New Zealand should be able to feed yourselves and others in a low energy world. I think Australia is OK for food as well, but countries with a high people to ag. land ratio are heading for trouble in a world with restricted access to mineral fertilisers to make the land fertile enough to yield the required food.

All we need now is a war to use up a large portion of available world nitrate production capacity and the problem of 'peak food productivity' will become apparent very rapidy.

Anyone thinking they can grow enough food to survive in a suburban back yard in a energy scarce world is deluding themselves. Take a calorie counter, a pocket calculator and a crop maturity/agronomy guide and do the maths. It won't add up to the daily calorie requirements of the 2-4 people living in an average house with an average garden, especially if your bankrupt government can''t afford to keep maintaining the water distribution network. (see Zimbabwe)

Whilst the majority wring their hands over what impact the financial crisis will have on their retirement plans or employment future ... bigger things are happening more worthy of angst and multri-trillion investments.

I don't understand why Americans are not decending on washington en-masse to stop the rot your congress and federal reserve are pumping out. You need to direct those trillions into re structuring your transport and agriculture sector. Stop the government subsidies that corrupt your farming system. The world won't want your worthless dollars and financial instruments in the future ... but a hungry person sitting in his shimmering desert or the tower blocks of Dubai will give you all the oil you want for some good American food.

The problem they don't mention is that 'extractable reserves' will now shrink even without any actual extraction … because of the dwindling supply of cheap energy needed to mine and process what are now 'low grade' ores.

To some, the history of nonrenewable resource exploitation seems to contradict the idea of an energetic limit short of mining common rock and "burning" seawater [10]. During the past 150 years large increases in the earth-resource base of industrialized society have been attained. By increasing the efficiencies of discovery, recovery, processing, and application of such resources, we have been able to find and exploit leaner, deeper, and more remote deposits. By discovering and developing new methods of utilizing previously worthless materials we have created resources where none existed.

Important in this rapid technologic advance has been a progressive lowering of the cost of energy per unit of work or useful heat obtained. Cheaper energy, along with technological ingenuity and discovery, has greatly extended the availability of nonenergy resources. In 1900 the lowest grade of copper ore economically minable was about 3 percent; today the economic cutoff has fallen to about 0.35 percent; at that grade each ton of refined copper produced requires the breaking, transport, and milling of almost 300 tons of rock and, in addition, the removal of perhaps an equal amount of waste or barren rock.

A great deal of energy-about 26,000 kilowatt-hours [11], the equivalent of the energy in about 4 metric tons of Wyoming coal-is required to produce a metric ton of copper today. "(end exceprt)

This scenario equally applies to all the inputs (especially fertilisers and transport fuels) used to produce food.

On the upside, a lot more people will be needed in future to grow food. This means fewer lawers, bankers, accountants and other drains on society, who will be now required to work fields and collect human waste to fertilise them.

It will be interesting to see how long it takes for this huge economic re-structure to play out. At nearly 10% depletion of oil this coming year (IEA) conversion will presumably be forced onto us in under 10 years. We will then be living in an economic system like Cuba, who lost their energy supplies when Soviet system collapsed.

Chris Martenson (see his website) defined money as a claim on future human labour. I like that.

In order for there to be future human labour, do we need banks?

No.

Do we need Cars, superannuation funds and the stock market.

No.

Do we need food and a means to get it to where it is needed to fuel the humans who do the labour?

Yes. Of course.

Let's just say that money is a claim on food and water FIRST. Everything else is really only parsley on the plate making the world look good.

We can pressure government to make planning and spending for sustainable food production number 1 priority now ... or we can wait for Mr. Market to demonstrate that 'corrections' also happen to markets where individual people are the units of accounting.

We also need to ask ourselves if the average billionare really expects to be able to claim THAT MUCH future human labour. What would an average billionare DO with a claim on 100 million man hours (at $10 per hour)? Build Pyramids like an Egyptian pharaoh? Conquer the world like Alexander the great? Can a billionare realistically claim those hours? Either the price of labour has to rise dramatically or a lot of dollars have to vanish to moderate this apparent imbalance. Dollars are vanishing pretty fast now, I wonder if that mean inflation in wages will also kick in soon to bridge the gap?

I wonder what the historic average is for how many man hours per year the top 1% of wealthy men commanded? Maybe a dollar should be re-badged the "Manhour". Maybe these 'manhours' should come with an expiry date to prevent people hoarding them and doing stupid things like making them into derivatives, etc?

Thank you, Bart, for this excellent analysis. There is much sobering "food for thought" in contemplating the endgame depletion of soil, mineral fertilizer and cheap fossil fuels. Clearly, the obsession with "cleaning up the financial sector" so everyonce can start borrowing more than they can afford again is not just misplaced--it's near-suicidal.

I know many observers believe genetically modified seeds which manufacture their own pesticides and additional nutrition via extra proteins, etc. may provide the answer, but even GM seeds need undepleted soil, water and transport to market. And the history of mono-crops (i.e. losing diversity of the genome via using only one variation) is not exactly encouraging.

Thus GM is easily raised from "potentially useful on the margins" (akin to shale oil) to "technological savior"--that is, a technology "fix" will keep the status quo chugging along with virtually no disruption in present production and price.

Unfortunately we're dealing with complex, dynamically interacting systems, not a single issue. Thus "magic bullets" like GM grain seeds (patented and owned by corporations, by the way) are doomed to merely marginal effects on a planetary scale.

Wednesday, January 21, 2009

Endgame 3: The End of (Paying) Work

The endgame isn't limited to the global financial meltdown or the complete repudiation of existing debt, policies and financial structures; it includes the end of an entire consumer-based, resource-profligate paradigm of work.

Various analysts have estimated the U.S. economy will shed about 2 millions jobs in 2009. Given that as of December 2008 there were over 137 million jobs, that doesn't sound all that horrific. Here are the numbers from the Bureau of Labor Statistics:

Setting aside the estimate of 2 million jobs lost, let's look at each category and make a rough back-of-the-envelope estimate for how much paying work each category might support in, say, 18 to 24 months.

Construction. While bridges being repaired will certainly support heavy-construction employment, the far larger categories of residential building and remodeling and commercial construction (office towers, malls, warehouses, etc.) are completely overbuilt for years to come. So let's guesstimate that there will be 50% less demand for construction and a job loss of 3.5 million in this category.

Manufacturing. Unfortunately, a tremendous amount of manufacturing is dependent on construction (glass, appliances, steel, etc.) and transportation (rubber, steel, components, semiconductors, etc.) both of which are in freefalls. Exports are falling as fast as imports. Let's be charitable and only carve off 3.5 million jobs here, leaving 10 million intact.

Retail. Does anyone doubt that fully 1/3 of all retail outlets are now surplus?

We're talking about fulltime positions here; so cutting hours from everyone on the floor may actually save jobs (i.e. hours cut will not show up in the above statistics) but the equivalent fulltime positions (that is, 40 hours of paid work a week) may well have vanished.

Let's guesstimate that 5 million retail positions will no longer be supported by sales/profits.

Professional and Business Services. Legal and accounting services will suffer as businesses fold. Businesses will decide they need fewer contract workers, fewer consultants, fewrer financial services and fewer software upgrades. Let's guesstimate that 2.5 million jobs will eventually be lost in this category.

Education and Health Services. These have been the growth industries, along with financial services, during the bogus "prosperity" of the past eight years. Once millions of jobs are shed, then millions of dollars of health insurance are no longer paid by employers, which means healthcare providers will get squeezed along with every other category.

Here is California, college enrollments are being capped as deficits soar; the inevitable next step is to leave jobs unfilled as people retire--one way or another, a reduction in total education employment. Let's guesstimate 1 million of these jobs get cut--perhaps not by layoffs but by retiring workers not being replaced.

Leisure and hospitality. The sad fact is nobody needs to take a cruise or a vacation; both are the acme of discretionary expenditures. I would be shocked if the U.S. economy didn't shed 3.5 million jobs in this category.

Government. Local government (cities, counties, states and agencies) has added 12% more employees in the past eight years of bogus debt-based "prosperity," and the freefall in tax revenues means those 12% of "new" government jobs will vanish--and that's the best-case scenario. Let's guess that a total of 2.5 million jobs will disappear as tax revenues plummet and then keep plummeting.

The total: 21.5 million jobs--10 times the MSM-approved estimate of 2 million jobs lost. Very few have the stomach to consider the reality that perhaps 20+ million jobs are no longer supportable by private industry revenues and profits and the tax revenues which depend on those profits and jobs. 21.5 million jobs lost works out to about 15.6% unemployment--a full 10% lower than the 25% unemployment rate reached in the Great Depression.

In other words, 21 million jobs lost is actually an optimistic guesstimate compared to what could transpire in the years ahead--a gradual evaporation of 30-35 million jobs. If Federal fiscal stimulis funds a couple million jobs--more likely retaining jobs in heavy construction and manufacturing that would otherwise be lost rather than adding jobs--then the total job loss might not be as severe until the "extra" Federal spending ends.

Just off the top of my head, here are industries which are sure to be hard-hit: media, advertising, cruise ships (many if not most will be mothballed), professional sports (how many people will be able to afford $45 tickets for lousy seats plus $10 for parking and $25 for a few beers and hotdogs?), spas, auto detailing, non-profits, pricey venues like museums which depend on wealthy donors (far fewer of those suddenly)--the list is long indeed.

Even worse, the deeper issue--the End of Work in a resource-profligate and consumer-based economy--isn't even being addressed yet.

Rifkin's primary point is that the "full employment" of the bubble eras (dot-com asset bubble followed by credit-housing bubble) was a temporary aberration from the underlying trend caused solely by unsustainable credit-based (borrow and spend) consumerism. The longterm trend is this: productivity is raised by the replacement of human labor (jobs) with automation/machines/software.

As productivity rises, the number of jobs decreases.

This reality has long been visible in manufacturing. The reality of competitive global forces lead to factories of robots assembling robot-assembled components with a few hundred humans to maintain the machines. There are already auto factories like this in Japan. The entire world's auto industry will continue shedding workers even if the number of units produced increases.

Rifkin points to the U.S. steel industry as another example. Since 1981, the industry has boosted production by about a third while reducing the number of jobs from 384,000 to 74,000.

Many observers believe the answer is to pay all of us $25/hour for service work so we can all afford the high-priced services provided by each other. In other words, I prepare you a $5 coffee (plus $2 tax) and then spend my earnings on a haircut, downloading a song off iTunes, going to a club and buying a high-priced drink, playing golf, etc. etc.

While this is certainly appealing--a high-wage service economy which is entirely self-supporting-- the nations which most resemble this model (Japan, France, Germany and Scandanavia) all depend on exports and a trade surplus, and all live with a structurally high unemployment.

In other words, their prosperity is still based on the old-fashioned model: make and sell more than than you buy/consume from others.

The only nation which has run massive structural trade deficits during "prosperity" is the U.S., and now the painful reality is revealed: that deficit-borrow-spend model has essentially bankrupted the nation.

Here is how the U.S. has gotten away with it: we have arbitraged our currency, in essence creating a "surplus" of chimerical value via the U.S. dollar.

One way to think about this is: we have traded dollars for goods valued at X (in other currencies, in gold, whatever metric you want) and paid for them with currency worth X-$700 billion: the dollar. This is how we have been able to sustain trade deficits which have broken every other profligate nation's economy throughout recorded history.

Since the rest of the world depends entirely on the export/trade surplus model, they really have no choice: either accept the dollar arbitrage (in effect ceding $700 billion in excess value every year to the dollar) or face the end of the export/surplus model.

Since nobody's come up with a sustainable alternative to the export/surplus model, then the entire world accepted the dollar arbitrage: sell to the American consumer, pocket a surplus to support one's economy, and accept the dollar arbitrage.

The U.S. has "exported" two things in exchange for trillions of dollars of oil and other real goods: inflation via a depreciation of its own currency, and "financial instruments" based on the dollar arbitrage. It continues to be a wonderful scam: we print/create with fractional lending as much paper money as we want (X), and everyone continues to accept it as an IOU worth X when in fact it is worth X-Y (with Y being the U.S. trade deficit).

Can this model of global prosperity continue essentially forever? It's hard to see how, but to date it has proven extremely durable because nobody has a Plan B. So it might last for years to come--as long as the dollar arbitrage doesn't become too onerous. At what point does it become too burdensome? Nobody knows.

When the scam breaks down, then the export/surplus model will break down, and global unemployment will skyrocket. There is a lot being written now about the "race to the bottom" in currencies, in which every nation/trading bloc is trying to devalue their currency faster than their rivals in order to support their exports. What makes this so laughable is the one currency which is rising is--drum roll, please--the U.S. dollar. Why?

Because every other nation/trading bloc is still pursuing the export/surplus model: sell more than you buy. That requires they not only accept the dollar arbitrage, they must actively support it. Many observers are astounded by the dollar's strength: this profligate nation's currency should be plummeting like a stone, yet instead it rises!

Once you understand the global dollar arbitrage--we buy your goods to support your export/surplus model, and you accept a dollar intrinsically worth less than the the goods sold, and everyone walks away happy--then this seeming impossibility makes sense.

Were the dollar to fall, as many expect, from 86 on the DXY (dollar index) to say 45, then the global export/surplus model of everyone selling their surplus production to the U.S. will no long work. Since there is no Plan B, then it's in everyone's interest to keep the game going. It's a lot less painful to accept a "hidden" loss via dollar arbitrage than it is to face structural unemployment and civil unrest if the export model breaks down.

We also read how China is going to transition to a domestic economy, but a study of history finds virtually no examples of such a model. Wealth and thus prosperity has always been created by trade, and it precisely the point at which China turned away from global trade in the 16th century that its long decline began.

I recently toured a 40-acre biodynamic vineyard in Sonoma County, California. Biodynamic is basically one step beyond organic: not only are no pesticides or chemical fertilizers used, virtually no outside inputs are used: the land supports itself, as it were, by careful shepharding of insects, mulching, a few animals which graze off the grass/ground cover, etc.

Yes, the vineyard has machinery which operates on oil: there is certainly an enormous energy input from outside the system. But other than the cost of shipping the product (wine) to market and transporting visitors to the site, most of the work is manual labor.

This model employs about a dozen people year-round. Most of the work is hard physical labor: pruning vines, spreading mulch, etc. This work cannot be entirely mechanized, and software can do little to add value/productivity. But then the question becomes: what is the tradable value of the resulting product? If the wine sells for $30+ a bottle, then the vineyard is a viable model in our high-cost economy. But if the tradable value of the product declines to say $10 a bottle, then the wages generated by the enterprise must likewise fall.

Rifkin is an optimist, as he sees the possibility of a new model in which "paying work" is replaced by "work" in a high-tech hydrogen-based economy.

While we work toward that goal--or some alternative vision, if you prefer--then we better be ready to fund food stamps and unemployment benefits for 20 million people without paying jobs, and find something productive for them to do--for idle hands eventually find employment with the Devil.

Tuesday, January 20, 2009

Endgame 2: The Injury Analogy

The endgame of the global financial meltdown is the complete repudiation of existing debt, policies and financial structures. This week's series will examine various parts of the endgame in more detail.

While the nation rightly celebrates the peaceful transfer of Executive power today, I propose the coming endgame will be akin to being seriously injured.

For whatever reason (fate plus carelessness?) I have suffered quite a few injuries in my working life, as well as several serious auto accidents in childhood as a passenger. So I think it is fair to say I know the experience of injury rather well.

I think the U.S. as a nation is entering an endgame which will result in the loss of much of what currently passes for the American Dream/American lifestyle. I consider myself an optimist because I believe we will still retain the rights to life, liberty and the pursuit of happiness; others with a darker view of the future are less confident we'll even hang onto these rights.

We all know about the financial meltdown and the collapse of assets, and the coming demographic crisis; but we also face a global population/consumption crisis which correspondent Michael S. summarized very succinctly:

In other words, there are plenty of geopolitical and environmental conditions which are outside the control of any one nation which could greatly increase the injury to many nations.In my early 20s, I was driving a small tractor alongside a grassy shoulder of a busy two-lane highway. Somehow I missed seeing a guywire to a power pole and the tractor wheel rode right up the wire, throwing my off. Amazingly, the tractor skidded off the wire and righted itself; picking myself up, I got back on and drove the tractor to the farm supply rental. When I got home, I slumped against a wall, very sore and very glad to have been lucky, as it could have ended much, much worse.

In my late 20s I was working on the metal roof of a three-story house in a light misting rain. I was trying to finish the last bits of steel roofing (a standing-seam type) by the farthest edge when I lost my footing. The drop was about 35 feet and though I'd tied myself off with a rope it was nothing fancy--just a rope around my waist. I hit the end of the rope at about 30 feet, at which point it snapped, breaking my fall.

That I wasn't killed outright or crippled for life is a miracle; lots of people get killed by such falls. There's an unfinished house in my brother's village in France, a sad structure to be sure, as the owner was killed when he fell from its roof.

Just a few years ago I was replacing a composition shingle roof on a two-story building, and the ladder had somehow edged from secure to insecure--a matter of a few inches. The ladder skidded off the gutter and I fell. The details of exactly how are lost to me, as I was knocked out when I hit the ground; I think my head slammed aginst the foundation wall, but this is just a guess. I came to with the worried faces of the residents gazing anxiously down at me.

A sharp foundation block was only a foot or so away from my head; if I'd fallen a bit differently, I might have hit that and it would have been all over. As it was, I was so sore it felt better to hobble around my living room for a few hours every night than lay down.

I won't bore you with the motorcycle and bicycle accidents, or how I was blinded in one eye in another onsite accident; you get the picture. I'm reckless, careless, unlucky or accident-prone, and yet also lucky to still be among the living.

Once you regain consciousness that's already a good sign, of course; but you don't know how badly injured you are at first because you're in shock and a bit hazy. So you move your limbs--hey, they still move, good sign--can you still see?--and then you try to get up. Depending on how that goes, then you slowly add information on what might be seriously damaged. Internal injuries are the most worrisome because you can't assess that easily; you really need to get to a hospital to see if your spleen is still whole, etc.

All of which is to say that nobody knows how the endgame will go. We only know the damage is severe and a "win" (i.e. a return to 2006 or 1996) is impossible. As with all injuries, luck, fate and God's will play decisive roles, and no one can foresee how all the moving parts will interact.

Maybe new energy technologies and a settlement of geopolitical tensions will enable us, if we move our last pieces very carefully and cleverly, with an eye on history, to end the endgame with a draw--that is, no massive civil unrest, no loss of liberties, no food shortages, etc.

The worst thing to do when injured is to stagger to your feet and act like you're absolutely fine. This greatly increases the chances of making your injuries much, much worse. I classify promouncements that the U.S. economy will "only" lose 2 million jobs in 2009 and that all this is just a rough patch we can fix with a couple trillion dollars of public spending on infrastructure, etc. as leaping to our feet, saying, "No, really, I'm fine, it only hurts a little," etc.

But we would be extending our recklessness not to see that we've been reckless: reckless with unpayable promises, reckless with regulations (lax on the super-wealthy, stranglingly tight on small business, M.I.A. on imported food safety, etc.), reckless with borrowing, reckless with the lives of our Armed Forces' servicepeople and so much more.

So the first step is to admit to our recklessness and make sure we understand just how badly we've been injured.

Secondly, we have to be careful with whatever assets/"health"/strength we still retain; trying to fix the internal injuries with band-aids and bed rest isn't going to cut it.

Third, we also need to be alive to the risks that our luck may not hold. A nuclear device could go off somewhere, or Saudi oil could stop flowing for any number of reasons; a multi-year drought somewhere could trigger a global food shortage, or a deadly SARS-type virus could escape quarantine. Just because we survived the first fall doesn't mean we're now immune to further injuries.

Fourth, we need to be careful not to confuse swallowing a handful of painkillers to ease the immediate pain (i.e. "fiscal stimulis") with actually getting better. Real healing takes time, and care; just masking reality with painkillers can make matters much worse by instilling an entirely false confidence that "I'm all better now."

When you wake up the next morning, you are sore--maybe more than sore. But if you've experienced other injuries before, then you know one key to a speedy recovery is to relax and focus on the fact that your body has been selected by millions of years of evolution to heal itself if given a chance.

When you're in pain, your muscles tend to tighten up, which only makes the pain worse. So step one in recovery is to relax. That's harder than you might think when you're really hurting, but it does help.

The U.S. economy, like an organism, is selected to heal itself, if given the chance. But right now it looks like the "cure" being prepared is to strap the patient down and load them up with one medication after another, without regard to the potentially dangerous interactions and the dazed and confused state of the patient.

Most dangerously, many seem wedded to the fantasy that the injury is modest in scope, and that we can still "win" the endgame with our King, Queen, one Knight and a single pawn. Playing to "win" when a draw is your only shot will doom you to a total loss.

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